The British Film and Television Industries - Communications Committee Contents

Examination of Witnesses (Questions 322-375)

Mr John McVay, Mr Charles Wace and Ms Andrea Calderwood

22 APRIL 2009

  Q322  Chairman: Welcome and thank you very much for coming; we are very grateful to you. I think you know what we are doing. What we basically are seeking to do is to look at film and television and see what contribution they are making—I suppose that economic contribution is one of the most important but it is not the only contribution—and then to see what else the Government, any government, can do to help the movement go further. That is what we are about really, to see what else we can suggest in two very important industries. Mr McVay, perhaps you would like to begin. Could you explain to us what the objectives of your organisation are and how your organisation is made up.

  Mr McVay: I would like to introduce my Chairman, Charles Wace, who will give you an opening statement on what that is.

  Mr Wace: PACT is the trade association that represents the interests of the independent production community in terms of television and in terms of film. I think that we like to see ourselves as being one of the few successful parts of the creative economy at the moment, even despite the credit crunch and everything that has been thrown at it. The independent production community currently turns over some £2 billion. We create more than half of all UK TV programmes. In the UK as a whole when you look at film, it actually has a total investment of more than £0.5 billion in terms of film last year. Collectively, we employ more than 21,000 people and that is more than all the PSBs put together, the public sector broadcasters put together, and it is not just commercial success, it is creative success as well. If you look at the last Oscars, Slum Dog Millionaire was a run-away success with eight Oscars in the film sector and, in the documentary sector, Man on Wire winning an Oscar for best world-wide documentary.

  Q323  Chairman: Your estimate is that you employ 21,000 people?

  Mr Wace: That is indeed correct.

  Q324  Chairman: How many companies? I have it down here as 600 member companies.

  Mr McVay: That is correct; it is around 600. It changes because the barriers to entry to be a film or TV producer are quite low. So many people start up businesses and, if they are still in business two years later, they have probably become a producer. The churn rate is quite high; we estimate around 20 per cent of our membership at any time.

  Q325  Chairman: I suppose there is always the feeling that when one says independent production companies, these are really rather small companies, but in fact that is not the case, is it?

  Mr McVay: No. As a consequence of the Communications Act 2003, we have seen considerable consolidation in the sector. When I started at PACT many years ago in 2001, we had over 1,000 companies and we are now down to 600. The top ten companies account for 80 per cent of all TV product for British broadcasters and increasingly the top six account for the vast majority of international production as well. They range in scale from companies turning over £200,000 a year to companies turning over in excess of £300 million a year.

  Q326  Lord Gordon of Strathblane: Chairman, I wonder if it would be possible to get from our guests a short paper just illustrating this very wide spread that there is between the small garret operation and the company that is really at least as big as some television companies.

  Mr McVay: Yes, absolutely. There are various documents which we can provide you with and we would be delighted to do so.

  Q327  Chairman: Why has the Communications Act 2003 had an impact?

  Mr McVay: For the 20-odd years prior to 2003, the independent sector was effectively a fee-based business where you were a gun for hire, where you worked for a broadcaster and you obtained little, if any, value in the intellectual property rights in the programme. Post the Communications Act 2003—and a very progressive and far-sighted bit of legislation if I may add—it enabled companies—

  Q328  Chairman: In some parts.

  Mr McVay: I would say for the UK, it enabled entrepreneurs to raise money to float on the stock market, to raise funding from private equity and venture capitalists and that drove a period of consolidation where companies moved together in order to become more globally competitive. That has been very productive. The UK independents now account for a large part of US prime-time networks and, for some of our members, the revenues from the US will exceed $100 million over the next year.

  Q329  Chairman: If you were to generalise, do you find the independent production sector in sturdy health at the moment?

  Mr McVay: I think that it is precarious. Clearly with the downturn in advertising revenues and the pressure that places on commercial broadcasters, there is increasing price pressure in the market, but because producers own their own intellectual property rights and are able to sell then to the international market where, for instance, a company like ITV may now offer considerably less for an hour of prime-time drama in the UK, producers are now able to go and find the deficit finance in other territories and bring that to the UK programme budget, which means that UK audiences actually still get high-quality programming that actually our market cannot really afford. So, it is a combination of spread risk between the broadcaster and the producer and producers, because they own their property, are driven to exploit it internationally. So, we have moved from basically a cottage industry focused on earning fees for a job to basically becoming a more global and IT-based industry.

  Ms Calderwood: It also means that producers actually bring investment to production whereas in the past producers were always looking for the broadcaster to fully fund production. Producers actually bring a significant proportion of investment to the table.

  Q330  Chairman: Previously, you were rather a gun for hire, if I can put it that way, working entirely on a fee basis.

  Mr McVay: Absolutely and well paid.

  Q331  Chairman: Now, it has become much stronger. Do the producer companies have too much power?

  Mr McVay: No because, at the end of the day, it is the buyers who are always dominant; it is the buyers who have the money and you have to produce the ideas and the talent in order to win a commission. Given that the four main terrestrial networks are still the dominant buyers in the UK market, if you cannot win a commission and you cannot come up with the package that the broadcaster needs, you will not win the work. Buyers are still the people who write the cheques and, without coming up with ideas and winning commissions ...

  Q332  Baroness McIntosh of Hudnall: May I go back to the number of people you employ; I think you said 21,000.

  Mr McVay: That is according to Skillset's own employment census.

  Q333  Baroness McIntosh of Hudnall: What I think we are struggling with is understanding what these employment figures actually mean in terms of whether that is a full-time equivalent number or whether that is 21,000 people for example who regard themselves as predominantly employed in the business of making film or television but do not actually necessarily make a full-time living out of it. Can you unpack the figure for us a little?

  Mr McVay: As I say, it is Skillset's figure but I am happy to provide further analysis on that. As I understand it, it is the full-time equivalent but the vast bulk of those jobs are freelance jobs and short-term contracts which applies to film and television—that is how the industry is structured—where productions flex. Production companies flex when they win a commission and reduce when they do not have any work.

  Q334  Baroness McIntosh of Hudnall: Putting it very simplistically, 21,000 people, so to speak, might in fact be twice or three times that number of people doing the equivalent of 21,000 people's worth of work, which means that the spread of work actually does not provide necessarily a good living for everybody who is involved in the business.

  Mr McVay: I think that, like in any labour market, if you are highly skilled and highly talented in the film and television industry in whatever grade you work in, whether that is in production, directing, executive producer or post-production, you can earn a very attractive living and indeed that is why many people choose to work freelance because they have a choice of the different products that they work on. It is a creative industry, so it is not like you are turning up and packaging sandwiches, you are working on creative products. So, for many people, the choice of a freelance career is the way they develop their creative talent and ability and indeed that has been one of the strengths in the UK where we have a very flexible and creative labour market. Clearly in a recession where it is harder to raise finance for production and there is a decrease in production, that will impact unfortunately on the labour market as well and, like many other industries, one of the things we have to look at is our cost base in the UK, particularly in high-cost drama, in order to make sure that we are competitive both in terms of attracting inward international film production but also sustaining our very high levels of television drama.

  Chairman: We will obviously go into the employment and training position in much more detail when we will have evidence from Skillset.

  Q335  Lord Inglewood: Earlier in your remarks, in the context of television, you talked about the relationship between the broadcasters and yourselves. Obviously, partly because of the 2003 Act and partly because the terms of trade arrangements have been put in place, there have been changes in that relationship. Do you think that one side or the other is starting from an essentially dominant position and, if so, how?

  Mr McVay: I think that was one of the major insights in the Communications Act 2003 in that it created a more shared risk and more shared value and reward for the investment and the exploitation of British content. So, I would not say that either party is dominant. Again, one of the beauties, if you like, of the Communications Act was the introduction of very high level codes of practice which have been introduced by the Regulator. Those codes of practice do not dictate the terms that are subsequently negotiated. Those terms are negotiated between ourselves and the four regulated broadcaster concerned—BBC, Channel 4, ITV and Five. So, it is a market negotiation and that market negotiation reflects the differences/changes in the market. I would say that, like any negotiation, you win something out of that and you lose something out of that but, at the end of the negotiation, by and large, most people have walked away reasonably satisfied that the terms they achieved were equitable.

  Q336  Lord Inglewood: That is probably the crucial point. You feel that the framework within which you operate enables a fair deal to be struck from each side's perspective?

  Mr McVay: Yes. Clearly some broadcasters post the negotiation maybe felt that they did not do as good a deal as they wanted to, but all is fair in love and war.

  Q337  Lord Inglewood: Win some, lose some.

  Mr McVay: Yes.

  Q338  Lord Inglewood: You also spoke earlier about the desirability of being able to exploit all the secondary IP rights which obviously have burgeoned and become much more valuable.

  Mr McVay: Yes.

  Q339  Lord Inglewood: Then you intimated that you felt that your members were not getting a fair crack of the whip. Is that right?

  Mr McVay: I think that previously we do not think that we were getting a fair crack of the whip. I think we have every chance now to exploit our content. There are still some issues in the market which we think are damaging to the long-term development of the communication and media industries in the UK and that is often to do with what is called a hold-back by broadcasters on the content, particularly in relation to returning popular series where those series cannot be released for secondary exploitation for anywhere from two to three years. In 2006 when we agreed that, that seemed eminently sensible but, in a world which is accelerating to high-speed broadband, two years might as well be 20 years. We think that there needs to be some sort of review about what is effectively warehousing of content from the secondary markets in order to allow particularly broadband and video-on-demand services to further develop in the UK.

  Mr Wace: It is also fair to say that the industry is moving ahead very quickly in terms of digital and I think that we are very keen to see the framework that exists in television also replicated in the digital framework as well so that digital producers have the same rights as television producers.

  Q340  Lord Inglewood: Digital Britain is proposing that there should be a government review of this area. Are these the kinds of things that you are thinking that review should contain and is there anything else?

  Mr McVay: Absolutely. We do think that Digital Britain has an important role to play to set the framework or give at least a direction of what sort of market we will see developing in the UK. One area which we have asked Digital Britain to look at specifically is public sector procurement. Currently, if you are creating a website for a government department, you might come up with a unique bit of code that could be used later on in some other commercial application. Again, currently, if you write that code, it then gets taken off you under Crown copyright and it cannot be exploited. Our position is that while clearly there are issues around state aid on that and clearly the public should get some return to their investment, that investment could be seen as seed funding for the development for our next generation of digital companies making digital content.

  Q341  Lord Inglewood: But the converse is true that if suddenly all this framework were to be removed, you think that your members would be in an unfair position in the market.

  Mr McVay: If we did not have the codes of practice via the Communications Act to sustain the development of the sector, we would retract very quickly, broadcasters would seek to take all programme rights on all platforms in perpetuity in the universe, however so invented, —from their previous contract".

  Q342  Chairman: I would like to follow up Lord Inglewood's question. When you mention the public sector, are you basically saying that the public sector are an exception really to the fairness deal that you happen to have done elsewhere?

  Mr McVay: I think that we have demonstrated that if you allow British IP creators the opportunity to exploit the IP that they do create, both domestically and internationally, then they are driven to do so. If they have no access to the products they create because they are effectively warehoused either under commercial terms or under Crown copyright, then you are still guns for hire, and, as we move to a more digital era, we think that there is an opportunity to try and replicate what happened in television in the new digital commissioning. Clearly, the public sector spends in excess of £300 million a year on digital content.

  Q343  Chairman: Have you put this to the Government?

  Mr McVay: We have; it is part of our Digital Britain submission.

  Q344  Chairman: But you presumably put it beforehand, did you not?

  Mr McVay: We have been talking about this to Government for about two-and-a-half years.

  Q345  Chairman: Then you must by now have some vague feeling about how the Government respond to all this after two-and-a-half years of conversation.

  Mr McVay: We and various others have put various submissions to the Government around the development of Digital Britain, hence I think the creation of the Digital Britain project in order to resolve lots of issues around that, and clearly public sector procurement is part of what Digital Britain is looking at.

  Q346  Lord Macdonald of Tradeston: ITV seems to believe that taking more of its production in-house is essential to future viability. It is also looking at the possibility of ceasing to become a public service broadcaster. If that happened, would all your agreements with ITV then fall? Would they be free to take everything in-house? Is there anything in their present proposals about changing the quotas in terms of independents being commissioned from outside London et cetera that concerns you?

  Mr McVay: If ITV want to get 75 per cent, as they are entitled to under the law, of their own commissions, it is just a matter of them coming up with good ideas that their commissioning editors want to commission. There is nothing to stop them doing that right now. The fact is that about 36 per cent of all the programming is made externally by independent producers from across the UK. There is nothing to stop them doing that, I think it is just that there has been a vast migration of talent from ITV because of particular difficulties to the independent sector which is far more attractive in that you can work for a number of broadcasters, you may actually get some share options which make you money and clearly it is a far more exciting time in terms of who you can work with. ITV are perfectly able to hit 75 per cent. It is true that any broadcaster that ceases to be a licensed public service broadcaster is not subject to the codes of practice contained in the Communications Act, but there is an issue arriving in 2012 where the current legislation has to review whether those codes would be extended to digital platforms, amended or ceased altogether, and that is clearly a decision that any government will have to look at and the Regulator will have to look at by the time we reach 2012. I think that in terms of changing the definitions, this has been looked at twice by Ofcom and, on both occasions, they have said that any other changes have a range of unintended consequences and the current system seems to work quite well. I am very sympathetic to the concerns of Scottish Television, your previous company, who feel that ITV may not be dealing fairly with them as a broadcaster from Scotland in winning commissions for ITV network, but I think that has a lot more to do with ITV's ambition to restrict external supply rather than to do with STV's status as a broadcaster or not as an independent producer. I think that it has more to do with the corporate strategy of ITV management and less to deal with definitions or legislation.

  Mr Wace: I would like to make one other point as somebody who runs a production company outside London. ITV's decision to stop regional programming or large chunks of regional programming has had a devastating effect on the independent production community outside London because they were the lifeblood to many small companies and now they can no longer rely on ITV as a source of revenue which has had a very significant impact.

  Q347  Lord Gordon of Strathblane: For clarification, while accepting that the reasons for the dispute with ITV may be as you state, you would, as an organisation, not resist the idea of STV being regarded as an independent producer for ITV or indeed ITV itself being regarded as an independent producer for the BBC.

  Mr McVay: I am saying that we have an open mind. I make it clear that we will certainly have to look at what the consequences of that are because clearly, if you define STV as being an independent broadcaster, then you may also have to consider NBC Universal being defined as an independent producer as well. It would be hard to see how you carve out legislation on the definition of a postcode or a nationhood. I think that there is a real range of unintended issues there which means that we are quite open minded to have a debate about it but I think that Parliament and the Lords have to be sensitive to the fact that there are other broadcasters in the UK like NBC Universal, a major American studio, who might also suddenly become an independent producer as well.

  Chairman: Let us move on to UK content.

  Q348  Baroness Howe of Idlicote: I was very interested in what you had to say about children's programmes and that there is an 80 per cent fall which is absolutely appalling by any standard. Under those circumstances, I think you were suggesting that Channel 4 should have it enshrined in their requirements, but there are presumably other genres like drama which are in the same sort of ghastly situation. Is there a reason in your view for ensuring that children above drama have preference or are you really suggesting that both those should be made mandatory as far as Channel 4 or any other public service broadcasters are concerned and, if so, how would you do it?

  Mr McVay: I think that we start from the position where there is clear evidence of market failure, such as in children's, then it is important for the State to consider what is the appropriate level of provision of that genre within the system and clearly, with ITV exiting the provision of children's programming several years ago, that is when we first started flagging up that there was going to be a car crash in children's production leaving the BBC as a monopoly buyer and provider, which is exactly what has happened, particularly in the age ranges of eight to 12 where there is no factual programming or drama now for children other than on the BBC. We would like to see a solution and the one that we posited is that Channel 4, under its new remit, PSB2 or whatever it will be called, should have an explicit commitment to older-aged children, i.e. from eight to 12, to provide factual and drama programming for them. We think that this would be in Channel 4's benefit because it would help build an audience for Channel 4 leading them to be in a very lucrative demographic as those children matured into 18 to 35 year olds which Channel 4 rely on. If drama is proving to have a market failure, then the rationale would be that there should be some solution for drama. At this point in time, clearly there is the recession in advertising which puts pressure on the amount of drama and the cost of drama in the UK. There is not actually a market failure as such; we may be heading there but I do not think we are there yet. If that were the case, we would support some sort of intervention to support the appropriate levels of drama to be agreed between the broadcasters and the regulator.

  Q349  Baroness Howe of Idlicote: You concentrate rather on the older-aged children—and there is an equally ghastly gap now as far as junior children as far as public service content is concerned—and say nothing about what is happening on radio with the BBC having got rid of that. What would you do about that and also should Ofcom be given greater powers given the fact that it did recommend, as you state in your evidence, that ITV should continue?

  Mr McVay: One of the major problems was that children's programming came into tier three in the Communications Act which meant that Ofcom could recommend but had no powers to do anything about it.

  Q350  Baroness Howe of Idlicote: Exactly.

  Mr McVay: So, ITV were at liberty to exit children's programming because of the opportunity costs that they saw in their schedule and Ofcom were powerless. So, no matter how many people—and I am sure you have heard many other people including ourselves—complain about that, effectively the legislation did not given Ofcom powers to do anything about it. We would like to see that changed and I am sure that Ofcom have a view about that as well. In terms of pre-school children's programming, the market has exploded for pre-school over the past several years with many cable and satellite channels providing a range of different products, most of that acquired and imported. We have also argued that if the Channel 4 solution was not credible or was not sufficient and there needed to be a fund that was contestable, then those channels should be allowed to compete for that funding in order to produce British content for pre-schools and clearly that is where the vast majority of British children actually watch programmes; it is not always CBeebies; it is actually on Nickelodeon and Cartoon Network, most of which are occupied by acquired programming that has little, if anything, to do with British culture.

  Q351  Lord Hastings of Scarisbrick: Picking up on the point that you have just made, Mr McVay, that there are other suppliers outside of the PSB suppliers, is it not possible therefore to argue that children's television is superserved by multiple offerings?

  Mr McVay: It is superserved in terms of the volume of acquired programming but not made in the UK. It is underserved by the volume of UK-originated content. We have no problem with many channels competing to give children a range of entertaining content from America, France, Japan, Canada and elsewhere. The problem we see is a deficit in the UK-originated content on those channels, many of whom would be quite happy to invest some of their own funds if there was a way to support that as well. The gap between their advertising revenue and the cost of UK production is too great for them to invest currently and many of them, when we talked to them, including Disney and Nickelodeon, would absolutely consider doing more British content if there was a way to incentivise that to happen.

  Q352  Lord Hastings of Scarisbrick: Could you give us some scale of the figures of the gap between production costs for children's programmes and advertising return.

  Mr McVay: I do not have that on me but certainly we can provide that to you from the Ofcom research which they did at the beginning of last year.

  Q353  Lord Hastings of Scarisbrick: If your appeal in your evidence is that Channel 4 should have this written into their terms of operation, would this represent a revenue stream that was reliable as it can cause funding dilemmas?

  Mr McVay: Yes, it would. Whatever the solution is to Channel 4's long-term budgetary needs for British content, within that, we would like to see a part carved out specifically for children. Clearly, how much that is could range from £15 to £25 million, but that would give a number of things. One is that it would give competition to the BBC to give different voices for children on British programmes because clearly Channel 4's editorial approach to children's programming will be different from the BBC's, which is good. Secondly, for us as producers, it means that there is more than one buyer in the market. So, if the BBC does not like my idea, I have somewhere I can maybe go and try and take it and that is clearly a good thing for the creative industries. Children's programming is very unlike most other areas of programming in that most of the people who work in it as producers are ex-teachers and they are very vocationally driven. We are very concerned that, if you only have one buyer, then why would you want to ever be a children's producer? If the BBC do not like what you make, then there is nowhere else to go other than abroad.

  Q354  Lord Hastings of Scarisbrick: In your evidence, you say that you are pushing for Channel 4 to take on further remit or for public broadcasters you talk about programming for school-age children you say specifically. Technically, that goes up to age 18 but you have not mentioned beyond 12 in your previous comments.

  Mr McVay: I think that is because the Ofcom research and our own earlier research on this before Ofcom did their work indicated that the gap was in factual programming for eight to 12 and drama for eight to 12. Most tweenies, 13 and upwards, tend to watch up, so they will actually watch older programming.[50] For those who are slightly younger, there is not a watch up because most of what they may want to watch up to their parents might not find appropriate for their age range. Without that, then their only choice is to go and watch more cartoons on the cable and satellite channels. It is not because they probably want to do that, it is because they do not have a choice to watch anything else.

  Q355  Lord Hastings of Scarisbrick: Given your comment about watching up, which is to a large extent on general programming, do you think that there ought to be a specific British content remit for the 13 to 18 age category?

  Mr McVay: I am not entirely sure about that. Our focus has been on slightly younger, either to 12 or eight to 13, if you want to dovetail with your question, because that is where we have seen the most market failure. I think because 13 to 14 year olds tend to watch older programming and programming that their parents will probably watch with them, then we do not see the same issues arising there. If you are 14, you can access a range of factual programming, drama and documentaries which are probably quite appropriate for you, in fact probably very educational and developmental as well, and of course the soaps. Soaps are a very good way of people reflecting on the lives that they lead as well.

  Q356  Baroness Eccles of Moulton: Mr McVay, I have two questions and they are related but different. The first one is about the Government public sector procurement and the warehousing under Crown copyright of the intellectual property rights and how this could possibly be released in favour of the next generation. Do you have anything to add on that particular point?

  Mr McVay: Yes. After the Philip Graff review of in 2004, Philip recommended that a 25 per cent external quota was applied to, at which point the BBC said, —This is all very difficult. We cannot do this. It is all new media". We then spent two years developing framework agreements with Those frameworks cover a range of types of provision from you inventing it to you just making it to you just writing the code. That has worked very effectively. We think that there are frameworks already in the market which could be adapted in principle to the public sector which would give clarity to suppliers on the types of contracts we are entering into with the public sector, but also clarity to the public sector as to what they were getting as well. We think it is worth considering. The private sector has effectively already moved this forward and we think there are lessons there that could be used in order to release some of that IP from Crown copyright subject to stated issues being resolved. It may be meaningless; it may be valueless. However, unless you actually try it, who knows? The next bit of code or a certain application for the Department of Health to assess diabetes might actually be a bit of code that could be utilised in various applications around the globe. Charles has a very good example of precisely how this does not happen just now.

  Mr Wace: We made a social networking site for the BBC for children which was a site that was designed to be safe for children to actually be able to socially network, a sort of closed environment and that is now the framework of the C-BBC website which has been enormously successful. The technology behind that website could, under the new terms of trade that we have with the BBC, now be sold by that independent production company around the world. Under the existing framework, which was not in place when this was developed, it was not able to be sold, so it was not actually exploited. That is a very tangible example of how technology is merging from a broadcast project into the software projects to which John was alluding. They are becoming one and the same increasingly.

  Q357  Chairman: Could the BBC not have exploited it?

  Mr Wace: Yes, they could and they have. One of the points that we feel strongly about is that if, as an independent production company, you can actually exploit your own copyright, you tend to do it much more successfully.

  Q358  Baroness Eccles of Moulton: Would this actually mean more benefit to the original external supplier?

  Mr McVay: It could do, yes. Currently, we cannot assess it because it is warehoused under Crown copyright and there is no way to get any market valuation. It will be up to the market. The UK is a market leader in terms of creativity. We punch way above our weight globally because of our creativity. I think that any government we have going forward will clearly look to deliver a range of public services through online and, if Digital Britain does deliver universal broadband access for everyone, then there is a huge opportunity to use that case mix to drive forward the development of new digital businesses that could become globally significant and we think that it is an historical opportunity for Britain because of our creativity, because of our unique placing between Europe and the US and because of our English language and our high technical skills to actually look at all investment, both public and private, as a way of releasing another generation of creative entrepreneurs who could then take advantage of the new digital world. It is hard to assess the value. We think that it is more if you want a political position and a philosophical position on it rather than a pure economic one at this time.

  Q359  Baroness Eccles of Moulton: My next question is one that we have asked several other witnesses and it is one of great importance and it is to deal with the commercial public service sector broadcasters' financial straits, and that is mainly Channel 4 and ITV, and how they have a heavy reliance on commissioning original UK content which is in decline. What would be very interesting to us is whether you have other ideas as to how more investment can be generated or leveraged from elsewhere.

  Mr McVay: They do have high levels of commitment to British content, and I think that that is a very good thing. It does make is one of the most exciting communications markets in the world and one of the highest quality and I think it is good for our overall creative industries which are, as you know, an important part of our GDP. One of the consequences of the Communications Act is that by giving the IP back to the producers, broadcasters have been able for the first time in 25 years to reduce their prices in the market. Prior to that, they had to fully fund a programme, so they had to take all the risk. Now, because they will not fully fund a programme, the producer has to take some of the risk and go and find the rest of the money. That money is currently coming from American networks, it is coming from DVD sales, it is coming from French broadcasters and German broadcasters, all of whom are paying for a slice of a British programme or a British format. That money is now going back into actually subsidising the programme budget for ITV, Channel 4, Five and the BBC, and increasingly for the BBC as all broadcasters seek to reduce the price of the programmes that they commission. For many producers, that is quite a challenge and, for some areas where the programme may have little commercial value, say for instance a topical documentary, we think that it is not in the public interest and broadcasters should fully fund those programmes. However, for the vast majority of other programmers, most producers now expect to have to raise a deficit in order to put that into the programme to enable it to be made for the British public. That has long been the state for British film producers who have to go out to the international markets and raise all the money for the films that they want to make.

  Q360  Baroness Bonham-Carter of Yarnbury: UK content, about which we are talking, is obviously driven by UK talent which needs to come from somewhere. Although we have a plethora of, dare I say it, media courses, we have fewer and fewer ongoing traineeship schemes and indeed, as I am sure you know, Mr McVay, there was a piece in The Guardian this week saying that most traineeship courses seem to have been put on the backburner because of the recession. I know that you come from a training background and that you are on the Board of Skillset and so on. Are you concerned about what is happening from the point of view of traineeships?

  Mr McVay: Yes. I am also on the Board of the new Industry Training Board for Film Skills as well.

  Q361  Baroness Bonham-Carter of Yarnbury: Indeed.

  Mr McVay: Yes, I am. I think that what was a particularly crude response to the recession was when ITV received £20 million of regulatory relief by the change to the licence and the next day they immediately halved their commitment to all training budgets. I think that was a very short-sighted and very damaging approach to take. Clearly in a recession, you must look at your cost base. However, as you come out of recession, the thing that will ensure that Britain is competitive is our skills and talent. Particularly in the creative industries, if we are not able to sustain investment in high-level talent, when opportunities do arrive, we may not be able to take them because we will not have the right talent available. Clearly, my members who are facing increasing price pressure from the broadcasters, while it is tough to invest in training, we are committed to try and encourage everyone to do as much as they can. With the new Film Skills Industry Training Board with a mandatory training levy, then the film industry will be paying and playing its way on that. However, I think that it is incumbent on the public service broadcasters, given that they do get a benefit from the licences that they receive, to ensure that they invest in skills. I think that it will be one of the most difficult issues over the coming 12 to 18 months.

  Ms Calderwood: Just to back John up on that, I think that it is crucial for the future health of the industry but also for diversity. Both myself and John would not be sitting here if it were not for various training opportunities. I worked with John on a training course—we both benefited from Lord Macdonald who I remember coming to talk to me on a training course I was on—and it brings people who would not otherwise be in the industry into the industry. Having training is absolutely crucial for a diverse and healthy industry going forward.

  Q362  Baroness Bonham-Carter of Yarnbury: Otherwise, it is work experience for which you are not paid.

  Mr McVay: No and work experience, if you are not paid, is actually illegal unless you are on a proper recognised course or are working for a charity, and that is something we took steps to eradicate two years ago because it is an iniquitous practice; it often relies on custom and favour and relationship which can be to the detriment of achieving a truly diverse workforce.

  Q363  Baroness Bonham-Carter of Yarnbury: In my day, the BBC had a wide variety of traineeship schemes; do they still offer traineeship schemes?

  Mr McVay: Yes, they still do. Clearly, the BBC is in a very comfortable position having regard to income and possibly, at a time of recession where others face more difficulty, the BBC should be doing more in order to ensure that there is a broad range of talent being made available to the industry in general going forward as part of its public purpose.

  Q364  Chairman: So, Lord Macdonald had a totally beneficial impact on your career!

  Ms Calderwood: It is his fault that we are here!

  Baroness Bonham-Carter of Yarnbury: That explains the dominance of the Scottish accent!

  Chairman: It purely explains the authority of this Select Committee!

  Q365  Baroness McIntosh of Hudnall: May we go back to the question of Channel 4 and its remit. In your evidence, you made reference to some remarks that Tessa Ross made when she was in front of the Committee a couple of weeks ago about the, as it were, public service element contained within what Film 4 does and she, as you have pointed out, very strongly felt that Film 4 should be included in Channel 4's public service remit and you seem to take the same view. Obviously from the point of view of the independent producers, there is a lot to be said for that: it guarantees that there would be a continuing market for independent production in the future. However, two things. Firstly, what do you think would be an appropriate quantum, as it were, of Channel 4's resources that should be devoted to film if it were part of their public service remit? Secondly, what would that contribute in your view to public service broadcasting overall?

  Ms Calderwood: We want to very strongly back Tessa on what she said about making film part of Channel 4's remit. We think that it is absolutely crucial that film is very central to the public service role of what Channel 4 does. The nature of film is that you have to reinvent the wheel every time. You cannot have a returning series and, whenever a talent is successful, it tends to be taken off to Hollywood though sometimes they come back. Each new film has to be started afresh and you always have to be looking for a new talent. I think that the BBC and Channel 4 play a crucial role in that. As there has been some consistent investment in film, they are able to look forward and are able to invest across the board and sometimes it pays off. This year has been a bumper year for Film 4. Having Slum Dog Millionaire, having Hunger, having Man on Wire, and having films like that I think has shown that, when you can invest across the board in film, you can get very strong returns, but it needs to have a confidence in the market to do that. Tessa has done a fantastic job of running Film 4, but whoever is running it needs to know consistently that investment will be consistently there, which is why I think it is very important that it is part of the remit. As to the level of investment, as John said about children's, that is something that could be discussed within the general content to the funding of Film 4 because what film does is tend to bring investment in from around the world. So, if you have approximately £10 million worth of funding that Film 4 has just now, it can do an awful lot with that because it can be the crucial risk funding, if you like, both for development and to be the first money into film which is something that Film 4 does very effectively. When I produced The Last King of Scotland for example, Tessa was one of the first people who said that she would back the project and she stayed with it consistently while we decided on various scenarios as to how we would put the rest of the budget together. While they were around half of the money in the film, it was crucial that that money was always there and was consistently there so that, when we went through all the various other hoops that we had to go through to set the film up in Uganda and so on, it was consistent funding. The way that Film 4's funding is set up means that they can be the most effective funding for British production companies.

  Q366  Chairman: Was The Last King of Scotland a commercially successful film?

  Ms Calderwood: It was a commercially successful film. It has made approximately four times its budget; it made about $40 million internationally. It has repaid its funding to its investors in the UK. Before Slum Dog Millionaire happened, there was a sense of —Will Film 4 be able to continue?" which was ironic because it was making money back from films like The Last King of Scotland and it does consistently make its money back. Every time there is pressure on Channel 4 or there is pressure on broadcasters, there is a question mark over film. I think that if film was part of Channel 4's remit, then that question would not keep coming up every time and it would be very ironic if Film 4 had not continued just when Slum Dog Millionaire was about to hit, and there is a feeling that Slum Dog Millionaire has certainly helped to bolster Film 4's position. As making film is such a boom and bust business, it should not have to depend on that because what Film 4 does is to invest across a range of films and, with any film investor in the world—and some of them are successful and some are not—there needs to be a consistency of funding.

  Q367  Baroness McIntosh of Hudnall: Firstly, I would entirely agree with you that it would be hideous if we were to lose Film 4 just at this point. Frankly, at any point in its history, it would have been a great loss. Turning to the issue about its contribution to public service broadcasting specifically, I might personally feel sympathetic to the idea but I think that, in terms of it being capable of being understood what contribution a film, for example Slum Dog Millionaire, is making to the notion of public service broadcasting as such, it is a little more difficult to pull that out. For example, compared with children's programming, it is perfectly clear that there is, as you have already said, market failure, there is a need and there is a public interest to be served in providing high-quality programming for children which all of us can understand. However, to make it a specific requirement of a public service broadcaster that they should be investing in film, particularly when those films then turn out to be commercially successful in the way in which Slum Dog Millionaire has been, is a more complicated argument and I wonder if you could amplify that a little.

  Ms Calderwood: It was not obvious that Slum Dog Millionaire would be the huge hit that it is when it was first initiated. It is a story about poor people in the slums of Mumbai and obviously there has been great debate about whether glamorising that life has been the right or the wrong thing to do. I think that by being able to commission a very diverse range of stories and subject matters which both represent the UK to UK audiences beyond the television audience and also represent the UK international is an absolutely crucial part of public service broadcasting. Film allows you to tell a range of stories that you would not necessarily tell on television. Although we are incredibly well served with television drama in this country, there is still a range of subject matters particularly subject matters which are a kind of cross-over between British stories and international stories. That is something that I think we do quite well in film and a lot of our films which have been successful have done that. Also, there is a sense where we can tell very particularly British stories, both to ourselves in a more broad ranging and entertaining way, in films like The Full Monty and so on which have classically been an entertaining product for audiences in the UK but have also represented Britain abroad very effectively. I think that British films are absolutely central to public service broadcasting where it leads on from drama, it leads on from factual programming, it allows us to represent ourselves to the world as well as to tell a broad range of stories to ourselves and it also allows British talent to be very active within Britain. There is a very clear pattern of British talent. Kev McDonald, for example, with whom I made The Last King of Scotland, has just made State of Play which is a British TV drama for Hollywood. His next project will be a much more British film. It allows British talent to come and go within the industry, everybody gets to raise their game and it brings more investment back here. If we were to lose British film, which I think we almost certainly would if it were not for the broadcasters' investment in film, there would be a huge gap in the range of output that we have in Britain.

  Chairman: I am afraid that we are going to move on because we are a little coming up against time.

  Q368  Bishop of Manchester: In the evidence which you have helpfully been giving this morning, words have appeared such as —deficit", —recession", —tough times" and I suppose not surprisingly and I wonder if we could be a little more analytical about that and if you could help me to interpret the figures at which I have been looking and trying to make sense of which are the UK Film Council's figures for film production over the period 1992 to 2008. It would appear that, for example, the year 2003 was a very good year. It would also appear in terms of co-productions that things have gone downhill quite rapidly over the last few years. If I were to try, in a very amateur way, to sum up the figures at which I am looking at the moment, I think they would suggest to me that, in terms of film production expenditure and in terms of employment, you are at a bit of a stagnation point at the moment and I wonder if you could clarify that for me, please.

  Ms Calderwood: I think the area in which there is a real cause for concern is in co-production and that is as a direct result of the tax credit which has come in. The tax credit has been a good thing in many ways. It has stopped abuse of the system that was there before. It is very clear and very straightforward to operate and people know exactly what they are going to get from the tax credit. However, the one problem we have with it is that it is based on goods and services used and consumed within the UK. For example, despite the fact that they had top British talent working on Slum Dog Millionaire, they could not claim tax credit on for example the director, the director of photography and so on because they were working outside of the UK. One thing that we are campaigning for as strongly as we can is that the tax credit is applied to British talent and British facilities used outside the UK as that would have a clear financial benefit to production. The Treasury set a target for how much they expected to spend on the tax credit and that target has not been reached. Even if we did change the definition to be on British goods and services used outside the UK, we would still be within the Treasury's target for that. It would make a huge difference to film production and it would also incentivise production companies to use British talent. For example, I am in the process of financing a film that is set in Nigeria and I will probably use crew from South Africa because they are slightly cheaper and there is no benefit to me taking British crew there. However, if I could claim tax credit for a British crew, I would take my British crew to Nigeria. If we could change that definition, then I think it would incentivise us to use British talent—we all want to use British talent because that is who we know and who we like working with—and it would give a clear financial incentive to use them.

  Mr McVay: Clearly, in times of difficulty and recession, it would be good to give jobs to British workers rather than give jobs to South African workers.

  Ms Calderwood: It also allows us to bring more to the table on co-production. The British industry likes to invest in British content. So, if you are trying to do international co-production, there are difficulties in what you can bring. If an international producer wants to shoot here and we can make more of the tax credit, then it allows us to co-produce more easily which would allow the level of co-production to go up again.

  Q369  Bishop of Manchester: We have heard about the issues over tax credits in other evidence. In terms of the economic downturn to which Mr McVay was referring a moment ago, how hopeful are you that things will get better, or are you really in a stagnation which goes deeper than simply an economic downturn?

  Mr McVay: In terms of the headline figures, you can see those various blips from 2003 to 2008. A lot of that is to do with dollar/pound exchange rate where Americans assess the cost of filming in the UK against the dollar/pound. Clearly, since that situation has improved, I am sure that, under the good offices of our Film Commissioner and the Film Council, they are working very hard to attract lots of American production to the UK and therefore we are hopeful that inward investment will be sustained if not increased. However, for indigenous co-production, the figures are very blunt and very bleak in that we have gone from a peak of 165 in 2003 to 42 co-productions last year. Now, that is where our major concern is because the co-productions are used by British indigenous companies, not by inward investment.

  Q370  Lord Macdonald of Tradeston: Just staying on co-production for a moment, are there any other economic factors involved or are you saying that the new tax credit scheme is entirely responsible for this decline?

  Ms Calderwood: I think that it is the key factor. You can see the difference. As John was saying, the dollar exchange rate had an effect for a few years. It has now gone the other way. Similarly, the euro exchange rate has gone the other way, so actually you are more likely to be able to now co-produce or the investment from the US for example goes further than it used to. That will start to slide in a different direction but I think that the tax credit is the one key factor that has made a difference.

  Q371  Lord Macdonald of Tradeston: Going back to the generality of the film tax credit scheme, you implied that it was an improvement on what went before. What kind of impact has it made on your members compared with the previous regime?

  Mr McVay: As the previous regime was subject to a number of loopholes and various very sophisticated financial instruments, sideways tax relief et cetera, when you were the producer and you had someone in a suit coming up to you and saying, —I can given you 40 per cent, don't worry how this is put together", you know, people wanted to get their product made. The new tax credit is very clear and very precise which means that the producer has confidence that, if they qualify for British film, the Exchequer will pay the percentage of the budget that is appropriate to the qualification and that is something that they can take to the bank and then there is not going to be any sudden review or any loophole being closed all of which caused incredible instability in the market for a number of years and which meant that when British producers were financing a film, they did not really know at which point the Inland Revenue may come round and say, —Actually, that process is no longer allowed. Therefore, you are now 20 per cent short on your budget" and you then had to go and find another 20 per cent from financiers somewhere else in the world. That created a great deal of instability and insecurity. Whilst there are parts of the new tax credit which we feel could be improved, compared to the previous regime, it is far more secure and stable and I think gives far better value to the taxpayer.

  Ms Calderwood: Another advantage of the tax credit is that it has been clearly targeted at producers rather than at financiers if you like, and what we have been doing in PACT is working with the public service broadcasters and the public funders to the Film Council to maximise the benefit of tax credit to producers. Initially, we tried to have the tax credit regarded as producer equity because it is not money that anybody else has to recoup, it is money that helps to finance the film but does not have to be paid back to anyone. That did not prove possible in the marketplace, but what we have done is that, by demonstrating to BBC, Film 4 and the Film Council how the tax credit improves their revenue, we can take a share of that revenue and we have negotiated figures around 25 to 30 per cent with the broadcasters and we are just in the process of trying to confirm that with the Film Council. The Film Council have agreed the principle of that, but it is now with the DCMS to be approved for state aid issues. That is something that would also make a very concrete difference to film producers because, as we said earlier, film producers basically have to sell their rights in order to finance the film, but this would create a revenue stream to film producers which would link the revenue of the film company to the success of the film in the marketplace and I think that that will make quite a crucial difference to film production companies.

  Q372  Lord Macdonald of Tradeston: If you are expanding the scope of the scheme, are you confident that you could define precisely what changes were made and that you could avoid the abuse through the extension of the scheme?

  Ms Calderwood: Yes because it is targeted at production companies and it is very much targeted on talent and facilities used and consumed in the film production. It very much now works on real films whereas before there were films that were almost made up as tax breaks basically. The tax credit as it stands now is here to make sure it is specifically for film production.

  Q373  Lord Maxton: You have some criticisms of the Lottery funding in the UK Film Council, which you have accused (—accused" might be the wrong word) of being commercially aggressive in the way they approach the money they get. Maybe you can explain what you mean by that.

  Ms Calderwood: The Film Council has done a fantastic job—to make that clear to begin with. I was previously the Head of Production when the Lottery franchise was active in Lottery film production when the Arts Council was giving money to film, and there was a big question mark then about whether it was possible to invest Lottery money successfully in film. I think the structure of the Film Council, which has fund heads specifically investing in certain films, has been shown to work and they have been involved in a broad range of successful films. The issue that film producers have with the Film Council is that their revenue from film goes back into funding Film Council overheads and non-film production related activities, which means that the Film Council tends to operate like a commercial investor because they are looking to increase their profit effectively, and the effect of that is that, rather than working in partnership with film producers to increase revenue across the board for reinvestment in film in the UK, they work in an adversarial way where they are trying to get a better deal from film producers. What we have tended to find, sometimes, is that they are the toughest people that we have to negotiate with, because they are looking to increase the revenue stream to the Film Council. That is not the case with other film funding bodies in other countries internationally, and it does not seem like the most healthy relationship between the Film Council and the film production community it is intended to support that they have this aggressive commercial stance. Obviously, if we agree—and we have agreed the principle—on this tax credit proportional share to producers, that will be a help because it will give a deal term that can be agreed across the board, like terms of trade for TV, but we would like to see the Film Council act more positively with film producers to try and find ways that they can work in partnership to raise revenue rather than this adversarial stance that they have taken in the past.

  Mr McVay: It is not because the people themselves are adversarial; it is because the structure that was conceived of when the Film Council was created was predicated on Lottery recoupment being reinvested to meet their overheads. So it is actually part of the structure. What we would like to see is a review of that structure to make sure that when Lottery funding was invested it was in the most productive and supportive way to enable successful British producers rather than to have to drive their overheads.

  Q374  Lord Maxton: What will be the impact of the fact that, because there is the Olympics, there is going to be a cut in Lottery funding, and there are indications, increasingly, that in the recession people are going to spend less on the Lottery anyway? So the general pot is going to be smaller. Is that going to impact, do you think?

  Mr McVay: We do accept that both those factors, the Olympics and, already, restructuring of the Film Council's finances, may impact on the amount of funds that they have to put to film. However, provided whatever amount they have is put in intelligently and supportively, we think you can still get optimal results to develop an indigenous and sustainable British film industry.

  Ms Calderwood: I think the case is quite similar to the case that used to be made when the terms of trade that John referred to earlier for television were being lobbied for; people said would TV companies know what to do with the revenue—would it not mean that the broadcasters would be weakened—and, actually, it has shown that the industry is stronger because they are stronger TV production companies. That is the argument that we are making for film companies; it is not to take all the revenue away from the Film Council but it is just that if there is a more substantial proportion of investment that comes back to film production companies they can move away from being fee-based companies—as the TV companies used to be—and they can actually work more effectively as stand-alone production companies. It is less of a cap-in-hand relationship; it is more of a genuine, healthy industry rather than always having to, effectively, ask for subsidies. So it is to find a way that we can share the revenues, because if production companies are incentivised to get revenue then I think, having worked in international productions where the production companies do have their government investment and their equity share, they are actually better funded companies, so they can bring investment to the table, as the TV companies do. So it is to try and find a way that a proportion comes to the production companies which would, in the end, benefit the Film Council because we should be able to make more profitable films on that basis.

  Q375  Chairman: That is a very interesting point. Thank you very much indeed. It has been a very interesting session, and thank you also for this extremely good submission, which I think is a model of what should be. We are very grateful. I think we are almost certainly going to have other questions to you, but perhaps we can correspond with you. Thank you for coming.

  Mr McVay: Thank you very much.

50   The witness has added a clarification to the effect that PACT's concerns about children's programming extend not only to the eight to 12 age group, but also to those up to 15 years, who may not be ready to -watch up". Back

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